On Friday, the Mexican Peso took a dip against the US Dollar, as data revealed Mexico’s economy lagged in the final quarter of 2024. The anticipation of slower economic progress amid ongoing uncertainties related to US President Donald Trump’s trade policies casts a shadow over Mexico’s economic prospects. Consequently, we saw USD/MXN shift to 20.33, marking a modest 0.14% increase.
In a more detailed examination, Mexico’s GDP shrank during Q4 of 2024 for the first time since Q3 of 2021, according to statistical insights from INEGI. The GDP figures aligned with quarterly expectations but fell short compared to the prior year’s projections.
Banco de Mexico is forecasting a decelerated growth of 0.6% for this year, revealed in their recent minutes. The projection for 2025 has also been revised down to 0.6% from the earlier prediction of 1.2%, significantly lower than the Finance Ministry’s anticipated 2.3% and below the 1% forecast from the Citi Expectations Survey.
With this backdrop, there’s a potential continued upside for the USD/MXN pair. The US is showing mixed signals; while manufacturing activity has seen an uptick, the Services PMI has slipped into negative territory, a first since January 2023.
In addition to these developments, recent data highlighted a slump in Existing Home Sales along with further declines in the University of Michigan’s Consumer Sentiment Index for February.
Market Summary: MXN Under Pressure, Economic Projections Dimmer
- The GDP dropped by 0.6% QoQ in Q4 2024, down significantly from a 1.1% increase and aligning with Reuters’ forecasts.
- Annually, Mexico’s economy grew by 0.5% in the fourth quarter compared to 2023 figures. The year’s overall growth was 1.2%, the lowest since 2020.
- Diverging monetary policies between Banxico and the Federal Reserve support a stronger USD/MXN. The Fed is anticipated to maintain steady rates, while Banxico might cut rates by another 50 basis points in the next meeting.
- Concurrently, President Trump has confirmed a 25% tariff on cars starting April 2.
- The US-Mexico trade tensions continue to be problematic despite past attempts at reconciliation. As February draws to a close, a 30-day pause is expected, with potential tensions on the horizon.
Technical Outlook for USD/MXN: Peso under Pressure as Pair Tests Resistance
The USD/MXN exchange rate is experiencing a gradual upward trend. After touching its lowest near the 100-day Simple Moving Average at 20.23, buying interest pushed it higher. However, it faces stiff resistance around 20.40, resulting in sideways movement.
Should USD/MXN breach the 20.40 resistance, the next targets might be 20.50, followed by the 20.93 peak observed on January 17. A further rally could see resistance at 21.00 and the year’s high of 21.28. Conversely, if prices plunge below 20.23, they could test the 20.00 level, with a potential floor at the October 18, 2024 low of 19.64, and eventually challenging the 200-day SMA at 19.37.
Frequently Asked Questions: Understanding the Dynamics of the Mexican Peso
The Mexican Peso is the most actively traded currency in Latin America. Its value is tied to the performance of the domestic economy, central bank policies, foreign investment levels, and remittances from Mexicans abroad, particularly those in the US. Geopolitical factors, such as nearshoring—or relocating production closer to home—boost the peso, with Mexico being a key manufacturing hub. Oil prices also influence the Peso as Mexico is a notable exporter.
Banxico, Mexico’s central bank, aims to keep inflation between 2% and 4%, aligning interest rates accordingly. Higher rates generally bolster the Peso by attracting investors, while lower rates might signal depreciation.
Macroeconomic indicators are critical in assessing the peso’s value. Strong economic fundamentals tend to appreciate the peso by attracting foreign investment and potentially prompting Banxico to hike rates if inflation demands it. In contrast, weak data generally results in depreciation.
Emerging-market currencies like the Peso thrive during low-risk periods but are prone to devaluation amid market turmoil, as investors often switch to dependable assets during such times.
